Imagine a world where China's economy isn't just a global powerhouse, but a balanced engine of growth benefiting its own people first. That's the challenge – and the opportunity – at the heart of the IMF's latest assessment of China's economic health. Welcome to the 2025 Article IV consultation press conference, where we'll unpack the key findings and recommendations.
Over the past two weeks, our team has had incredibly productive discussions with the Chinese authorities, and we extend our sincere gratitude for their cooperation. Let's dive into the updated outlook. Despite facing significant global economic turbulence, China has shown remarkable resilience. We've actually revised our growth projections upwards, forecasting 5% growth in 2025 and 4.5% in 2026. That's a 0.2 and 0.3 percentage point increase, respectively, from our October World Economic Outlook. This boost is thanks to both strong exports and a positive fiscal stimulus. This growth supports household incomes, which is crucial given current consumer confidence levels. It’s worth emphasizing that China is currently contributing about 30% to global growth, making its economic trajectory incredibly important.
This positive outlook creates a golden opportunity for China to tackle some pressing economic challenges. The Chinese authorities are aware of these challenges and are taking steps in the right direction, which is encouraging. However, we're urging them to act more decisively and with greater urgency.
So, what are these challenges? Primarily, domestic demand in China has been persistently weak. This is partly because the property sector is still unstable. This instability has eroded consumer confidence, leading to decreased spending and even deflationary pressures – a situation where prices are falling, which can discourage investment and further dampen demand. Low inflation, relative to its trading partners, has also led to a significant real exchange rate depreciation. This makes China's exports cheaper, but it also leads to an over-reliance on exports and worsens external imbalances.
And this is the part most people miss: China is simply too large to rely heavily on exports for growth. As the world's second-largest economy, constantly leaning on exports risks fueling global trade tensions and potentially harming its own long-term prospects. Add to this the challenges of slowing productivity growth, high corporate and public debt levels, decreasing returns on investment, and a rapidly aging population, and you have a recipe for slower growth in the years ahead.
Against this backdrop, the authorities have, in their 15th Five-Year Plan, prioritized increasing consumption as a driver of growth. They also acknowledge the importance of shifting the economy from manufacturing (goods) to services. We strongly support this strategic shift. Pivoting to consumption-led growth is the overarching policy priority for China's future economic success. The authorities are already taking steps to boost domestic consumption. They've adopted an expansionary fiscal stance, eased monetary policy (making borrowing cheaper), and implemented targeted measures to reduce excess saving and address what they call "involution" (intense competition). They've also gradually increased the retirement age, which will help expand the labor force and boost medium-term growth, and increased subsidies for elderly care and childcare to stimulate the services sector.
But here's where it gets controversial... While these initial steps are positive, more is needed – much more. In our discussions, we recommended more forceful policy measures, implemented with greater urgency. Let's highlight three key areas of focus:
First Area of Focus: Tackling Domestic Imbalances and Deflationary Pressures. This requires even more expansionary macroeconomic policies, coupled with reforms to reduce excess saving. We recommend a comprehensive macroeconomic policy package, including additional fiscal stimulus (government spending), further monetary policy easing (lower interest rates), and greater exchange rate flexibility. Fiscal policy should prioritize strengthening the social protection system. Why? To give people the confidence and security they need to spend more and save less. Our analysis suggests that increasing social spending, especially in rural areas, and accelerating Hukou reforms (the household registration system) that provide migrant workers with access to social benefits can boost consumption by up to 3 percentage points of GDP in the medium term. At the same time, public investment and industrial policies that favor specific firms and sectors should be scaled back. This would increase productivity by improving resource allocation and letting market forces take the lead. Reducing industrial policy support would also free up fiscal resources, which could then be used to increase social spending and address the problems in the property sector. Ultimately, boosting consumption can unlock the potential of China's vast domestic market, leading to smaller internal and external imbalances and a more sustainable source of growth.
Second Area of Focus: Structural Reforms to Lift Medium-Term Growth. We recommend reducing regulatory burdens, lowering barriers to internal trade (particularly in the service sector), leveling the playing field for all businesses, and implementing labor market measures to reduce skill mismatches and youth unemployment. These reforms will also help China fully exploit new technologies, particularly in artificial intelligence and energy efficiency. China's digital infrastructure is well-positioned to benefit from AI, but it's crucial to mitigate potential labor market disruptions and guard against new financial stability risks.
Third Area of Focus: Addressing High Domestic Debt Levels. Years of high investment have left China with significant public and corporate debt, leading to increased risks. The government's debt swap program provides short-term relief by reducing financing pressures. But to minimize long-term costs, unsustainable local government debt will need to be restructured. This should be combined with reforms to further strengthen financial sector oversight and enhance fiscal discipline and transparency.
What would be the payoff for all this effort? Making significant progress on these three priorities could substantially increase China's GDP – by about 2.5 percent by 2030. This could create around 18 million new jobs while simultaneously reducing deflationary pressures. It would also lead to an appreciation of the real exchange rate and a smaller current account surplus. A more balanced Chinese economy, both internally and externally, translates to a stronger and healthier global economy. In short, China has the opportunity to enter a new phase of economic development, shifting its growth engine from investment and exports to domestic consumption and reorienting its economy from goods to services. Seizing this opportunity requires brave choices and decisive policy action.
We look forward to continuing our close collaboration with the Chinese authorities to support their efforts in building a more balanced and inclusive economy. Thank you.
Now, let's open the floor for questions. But before we do, I'd like to pose a question to you, our audience: Do you believe China can successfully transition to a consumption-led economy, and what challenges do you foresee in this process? We encourage you to share your thoughts and opinions in the comments below.
